Northrop Grumman in running for tanker deal

Joelle Tessler

Published 7:00 pm, Friday, February 22, 2008

WASHINGTON -- The Air Force is just days away from handing out one of the biggest Pentagon contracts in years -- a deal valued at up to $40 billion dollars to replace 179 planes in its fleet of aerial refueling tankers.

For the three companies bidding, the award could be the culmination of a fierce battle over dollars, jobs and reputation.

Boeing Co. has supplied the Air Force with refueling tankers for nearly 50 years and doesn't want to let go of that. The incumbent is considered the favorite to win -- an assumption already reflected in its stock price.

But European Aeronautic Defence and Space Co. and its U.S. partner, Northrop Grumman Corp., want to be in on the game. For France-based EADS, the parent of rival Airbus, the contract is an entree into the massive American military market just as overseas spending cools. And for Northrop Grumman, it would tap into a major new military revenue stream at a time when Pentagon spending may be leveling off.

The contract -- worth $30 to $40 billion over 10 to 15 years -- is the first of three deals to replace the Air Force's entire fleet of nearly 600 tankers, which allow aircraft to refuel without landing.

For Wall Street, the award's potential really takes off with the follow-on contracts likely going to the incumbent. As much as $100 billion dollars over the next 30 years is at stake, says Loren Thompson, a defense industry analyst with Lexington Institute, a policy think tank.

Thompson said the Air Force will eventually buy more than 400 new tankers to modernize its full fleet in "the biggest new aircraft contract anywhere in the world." The Air Force currently flies 531 Eisenhower-era tankers and another 59 tankers built in the 1980s by McDonnell Douglas, now part of Boeing.

"This is one of the biggest defense contracts to come along in decades and will be for future decades," said Scott Hamilton, an aviation industry consultant based outside of Seattle. "You have to take the plums when they come along."

The tanker decision, which could be announced Monday, is certain to grab attention on Wall Street and in towns nationwide where jobs could follow.

Because Northrop Grumman, which has a large Norwalk presence, is considered an underdog, its shares likely will jump if it wins, but may not take a drubbing if the contract goes to Boeing. Yet Boeing's stock would almost certainly take a hit if the company loses, but only rise moderately if the award comes through since a win is already factored into the share price.

On Capitol Hill, members in both parties are lobbying hard for a victor whose spoils include local jobs.

Chicago-based Boeing would perform much of the tanker work in Everett, Wash., and Wichita, Kan., and use Pratt & Whitney engines built in Connecticut. The company says a win would support 44,000 new and existing jobs at Boeing and more than 300 suppliers in more than 40 states.

"The Boeing proposal is far superior," said Rep. Norm Dicks, D-Wash., a senior member of the House Appropriations Subcommittee on Defense who represents a district that is home many Boeing jobs. "I'm very hopeful that on the merits we're going to win."

Other Boeing supporters include Sen. Patty Murray, D-Wash.; Duncan Hunter of California, the top Republican on the House Armed Services Committee and former Speaker of the House Dennis Hastert, an Illinois Republican.

The EADS/Northrop Grumman team would perform its final assembly work in Mobile, Ala., although the underlying plane would mostly be built in Europe. And it would use General Electric engines built in North Carolina and Ohio. Northrop Grumman, which is based in Los Angeles, estimates a Northrop/EADS win would produce 2,000 new jobs in Mobile and support 25,000 jobs at suppliers nationwide.

Alabama Sens. Jeff Sessions and Richard Shelby, both Republicans, are cheering for the French to come to Mobile, as is Congressman Jo Bonner, R-Ala., who represents the district where Northrop has said it would assemble its tanker.

Analysts say Boeing also has an advantage because its KC-767 tanker is smaller and lighter than the KC-30 being offered by EADS and Northrop Grumman. That means the Boeing tanker would take up less space on the ground and burn less fuel. Still, the KC-30's larger size will enable it to carry more fuel, cargo or personnel on individual flights -- making it a more efficient plane using Air Force criteria, Northrop Grumman stressed.

EADS and Northrop Grumman estimate that compared with the KC-767, the Air Force would need 20 percent fewer KC-30 tankers to meet its refueling needs.

Despite all the drama, at least one analyst stressed that losing the tanker contract would not be a disaster for any of the companies bidding on it.

After all, the contract amounts to just over one tanker a month, noted Richard Aboulafia, an analyst with the aerospace consulting firm Teal Group. And with Boeing and Airbus each booking orders for 500 planes a year, that represents just a "drop in the bucket for the huge commercial jetliner market."